Author Question: Voidable Preference. The Securities and Exchange Commission (SEC) filed a suit in a federal district ... (Read 87 times)

c0205847 · **on:** Jun 24, 2018

Voidable Preference. The Securities and Exchange Commission (SEC) filed a suit in a federal district court against First Jersey Securities, Inc, and others, alleging fraud in First Jersey's sale of securities (stock). The court ordered the defendants to turn over to the SEC 75 million in illegal profits. This order made the SEC the largest unsecured creditor of First Jersey. First Jersey filed a voluntary petition in a federal bankruptcy court to declare bankruptcy under Chapter 11. On the same day, the debtor transferred 200,001 shares of stock to its law firm, Robinson, St. John, & Wayne (RSW), in payment for services in the SEC suit and the bankruptcy petition. The stock represented essentially all of the debtor's assets. RSW did not find a buyer for the stock for more than two months. The SEC objected to the transfer, contending that it was a voidable preference, and asked that RSW be disqualified from representing the debtor. RSW responded that the transfer was made in the ordinary course of business. Also, asserted RSW, the transfer was not in payment of an antecedent debt, because the firm had not presented First Jersey with a bill for its services and therefore the debt was not yet past due. Was the stock transfer a voidable preference? Should the court disqualify RSW? Why or why not?

Question 2

Emile owns Emile's Used Car Emporium. Several people work for him at the Emporium. When Emile is gone, he leaves one of his best salespersons, Meg, in charge. Over the years, Emile has given Meg the authority to contract with vendors, negotiate sales, and conclude car sales contracts in his name. One August, Emile takes a long vacation, leaving Meg in charge. While he is gone a hurricane hits Florida where the Emporium is located, causing severe damage. Because Emile is floating down the Amazon, Meg cannot reach him for instructions. She decides that rather than leave the place in shambles, she will hire people to repair the Emporium. Meg hires a carpenter to rebuild a wall that was blown down by the storm. Phil, the carpenter, is busy at work on his scaffold when Meg's Scottish terrier Adam, who she keeps with her at work, plows into the scaffolding while chasing a cat. Phil is knocked off the scaffold and falls ten feet to the ground, suffering a broken leg. As Emile's agent, Meg is required to:
a. mingle her personal funds with his b. engage in self-dealing
c. disregard orders given to her by Emile d. engage in unethical behavior
e. exercise reasonable care in the performance of her duties

ansleighelindsey · **Reply #1 on:** Jun 24, 2018

Answer to Question 1

Voidable preference
The court allowed RSW to remain as counsel for First Jersey, concluding that the stock transfer was not a voidable preference. The court reasoned that the transfer was not made to satisfy an antecedent debt because a debt is not owed until payment is past due, and thus this transfer was timely. The court also ruled that the transfer was made in the ordinary course of business. On appeal, a federal district court affirmed these conclusions, and the case was appealed to the U.S. Court of Appeals for the Third Circuit, which reversed the judgment of the lower court and remanded the case for an order disqualifying RSW. The appellate court concluded that the transfer was a voidable preference for or on account of an antecedent debt and that the transfer was not in the ordinary course of business. The court reasoned that First Jersey incurred a debt to RSW when the law firm performed legal services on the debtor's behalf. An antecedent debt owed by a debtor occurs when a right to payment ariseseven if the claim is not fixed, liquidated, or matured. In other words, a debt can arise before a bill is presented. Thus, RSW had a claim at the time it performed legal services for First Jersey. Its claim was antecedent' for purposes of the Bankruptcy Code. To determine whether a transfer is ordinary requires considering such factors as the timing of the payment, and the amount and manner in which the transfer was made. In this case, the timing of the payment to RSW is clearly suspect. The transfer of stock was made on the day the debtor filed its petition for bankruptcy. Also, that the payment was in the form of stock, for which RSW did not find a buyer for more than two months, showed that the law firm knew the debtor was in serious financial difficulties and could not pay otherwise. Law firms are usually paid in cash. Thus, the manner and timing of the payment suggests the transfer was not made in the ordinary course of business between the parties. (Because RSW had to return the funds, it became a creditor of First Jersey, and thus had a conflict of interest in the outcome of the bankruptcy petition, disqualifying the firm from representing the debtor in the bankruptcy proceedings.) This case was decided before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, but the result under that act would likely have been the same.

Answer to Question 2

e